A 2020 winner in Asia stock market is now the biggest loser

While technology stocks continue to front Asia’s equity rally, one hot sector from 2020 has fallen to the bottom of the leaderboard: health care.

Essentially flat year-to-date, a gauge of the sector is the worst-performing in Asia, lagging the region’s benchmark by nine percentage points. It is on track to underperform the MSCI Asia Pacific Index for a third straight month, the longest losing streak in three years.

A growing expectation of a return to normal for the global economy has caused investors to abandon defensive bets made during the pandemic, such as health care — the second-best performer last year. Energy shares have staged a comeback on the rebound in crude prices, while financials have strengthened thanks to the rise in bond yields.

“The market is reflecting re-opening and recovery expectations, which is supportive of cyclical sectors rather than health care,” said Kieran Calder, head of Asia equity research at Union Bancaire Privee Ubp SA.

Hefty valuations are also a concern, according to Calder. The industry gauge is trading just below 30 times forward earnings, the highest among all sectors, according to data compiled by Bloomberg. The benchmark is on just 18 times.

Fading retail frenzy

A fading retail frenzy in markets like South Korea has also played a role in the health care sector’s recent weakness. Shin Poong Pharmaceutical Co., a company that is developing a Covid-19 treatment, has slumped 36% this year after amateur investors helped it surge 1,600% in 2020. Celltrion Pharm Inc., another vaccine-related stock, has fallen 32% after rallying more than 500% last year.

“One of the prominent features of the South Korean stock market is retail investors actively trading stocks and strong herd behavior,” said Seo Sang-Young, a market strategist at Kiwoom Securities. “Unless there is additional events or earnings improvements, such as new drug developments for pharma or bio companies, stocks tend to go back to where they came from.”

Conversely, strength in technology stocks has extended into the new year, with a gauge of communication services names the top winner in Asia.

Some of the lockdown winners that provide exposure to long-term growth themes in countries like China will continue to outperform, according to Stephen Kam, head of product management for Asia ex-Japan Equities at Schroders.

“Tech hardware is one such industry, as people continue to work from home through 2021,” Kam wrote in a recent note.

© 2021 Bloomberg